Urban Improvement Trust not entitled to Tax Exemption under Section 10(20) of Income Tax Act, Supreme Court

The Supreme Court has held that an Urban Improvement Trust is not covered by definition of ‘local authority’ within the meaning of Explanation to Section 10(20) of the Income Tax Act, 1961 (IT Act). Hence, it is not entitled to tax exemption under the said provision.

The judgment was rendered by a Bench of Justices AK Sikri and Ashok Bhushan in a batch of

appeals against a judgment of Rajasthan High Court.

The question which was considered by the Court was,

“whether the Urban Improvement Trust constituted under the Rajasthan Urban Improvement Act, 1959 is a local authority within the meaning of Explanation to Section 10(20) of the I.T. Act, 1961”.

The High had held that an Urban Improvement Trust (assessee) is a ‘local authority’ within the meaning of Section 10(20) of the IT Act.

Section 10(20) had been amended by Finance Act, 2002. The Supreme Court analysed the history behind the amendment to Section 10(20). It noted that Section 10(20A), which existed prior to amendments made by Finance Act, 2002, specifically granted exemption to income of an authority constituted in India by or under any law and the Rajasthan Urban Improvement Act, 1959 was, thus, clearly covered by Section 10(20A) as was availing exemption under Section 10(20A) prior to Finance Act, 2002.

By the amendment, Section 10(20A) was deleted and Section 10(20) was amended to include an Explanation.

The Explanation added to Section 10(20) defines the term ‘local authority’ in four clauses of which clause (iii) is relevant to the case. Clause (iii) of Explanation to Section 10(20) is as follows:

“(iii) Municipal Committee and District Board, legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; ”

The Court then proceeded to dissect the nature of Urban Improvement Trust which is constituted under the Rajasthan Urban Improvement Act, 1959.

It noted that a perusal of the Scheme of the Rajasthan Urban Improvement Act, 1959 as well as the Rajasthan Municipalities Act, 1959 indicated that Urban Improvement Trust undertakes development in the urban area included in municipality/municipal board. Urban Improvement Trust is not constituted in place of the municipality/municipal board rather it undertakes the act of improvement in urban areas of a municipality/municipal board under the Rajasthan Urban Improvement Act, 1959, the Court observed.

Thus, Urban Improvement Trust is a not a municipality or municipal board.

It then considered whether Urban Improvement Trust can be considered as falling within the ambit of “Municipal Committee” which is mentioned in clause (iii) of the Explanation to Section 10(20).

Placing reliance on a slew of judgments, the Court held that the word “Municipal Committee” occurring in Clause (iii) covers those bodies, which are discharging municipal functions but are not covered by the definition of municipalities as was required to be constituted by Article 243Q of the Constitution of India.

Urban Improvement Trust constituted under the Rajasthan Urban Improvement Act, 1959, thus, cannot be held to be covered by the definition of Municipal Committee as contained in Clause (iii) of Explanation to Section 10(20), it concluded.

Further, the Court also adverted to the object behind the deletion of Section 10(20A) and amendment to Section 10(20).

Urban Improvement Trust was fully covered by the definition of authorities as contained in Section 10(20A) prior to its deletion. When there was a specific deletion of Section 10(20A), the said deletion was for an object and purpose, the Court observed.

It held that the deletion of authorities, which were enumerated in Section 10(20A) was a clear indicator that such authorities, which were enjoying exemption under Section 10(20A) shall no longer be entitled to enjoy the exemption.

Based on the above, the Court concluded that an Urban Improvement Trust cannot be held to be a ‘Municipal Committee’ under clause (iii) of Explanation to Section 10(20) of the Act. Thus, it is not a ‘local authority’ within the meaning of the said provision and is not eligible for tax exemption.

The judgment of the High Court was, therefore, set aside.